Matein Khalid
The last time the U.S. Dollar Index plummeted 9% in the first four months of a year was way back in 1973, when Richard Nixon sat in the White House on the eve of Watergate, the October War in the Sinai/Gulan, the Arab oil boycott and a savage 40% bear market in U.S. equities.
Last week provided a respite from the tsunami of greenback selling that had taken the euro to above 1.15, sterling to 1.34 and gold to $3,500 an ounce. The Dollar Dump is not over but the treasury bond market has healed its basis trade fissures, 10 year yields have fallen to 4.25% and gold has corrected below $3,300 even as bitcoin has risen to $95,000 and credit spreads/volatility has compressed to boost the value of risk assets.
However, I cannot ignore the darkening macro storm clouds beneath the “don’t worry, be happy” zeitgeist last week on Wall Street as Uncle Scrooge is still itching to be the macro party poopa. The U.S. dollar will resume its debt dive after a counter cyclical rally for the next three weeks. Why?
One, the U.S high frequency consumer data is truly horrific. From credit card spending to travel receipts, from household bankruptcy upticks to subprime mortgage default rates, lower guidance by PepsiCo and Walmart, the message in the bottle is crystal clear. Joe Six Pack is hurting and this is even before the tariffs have bloated the cost of his avocados and beer. The only consolation is that the yuppies will be guzzling expensive Corona, with a lemon as the Mexican tariffs kick in. A consumer recession is now certain and the US consumer is still 70% of American GDP and 34% of global consumption. Double ouch!
Two, Trump has done a U-Turn on his threats to terminate “Mr. Too Late/Loco/Major Loser” Jay Powell, but his violation of the post Regan/Thatcher taboo against interfering with the political independence of the Central Bank has had a chilling impact on the US dollar as the caprices of Erdonomics did on the fate of the Turkish lira. The new order in Washington monetary politics is not positive for U.S. dollar assets as is the laws of any rule of law protection.
Three, US-Chinese relations will not suddenly pivot to a warm and cuddly rapprochement, even if Trump invites Xi to his birthday bash in Mar-a-Lago on June 14th. It was just not a good idea for JD Vance, a man with six stepfathers and hillbilly DNA, to call the 1.4 billion Chinese people ”peasants”. Xi has lost face and the ruler of the Dragon Empire will never do a trade deal under duress.
Four, the geopolitical convulsions of Trump’s protection racket diplomacy has unnerved both US foes and allies alike. Reserve managers worldwide are increasing their allocations to hard currencies/gold even though the U.S. dollar is still 70% of all transactions in the $7 trillion a day FX bazaar.
Five, America faces the worst of all Panglossian worlds with 0% economic growth, a tariff price shock, 5% inflation, an interest rate bloodbath, a $2 trillion budget deficit and a $37 trillion in national debt with debt service costs higher than the $800 billion Pentagon’s defense budget, a credit Frankenstein of $9 trillion refinancing risk will devastate private capital markets and real estate as the SOS in KKR and Brookfield shares forecast. Net-net strategic dollar allocations are set to plunge since $19 trillion in foreign owned risk assets in the States scramble for an exit window.
Six, the yen is a clear winner in the new world struggling to be born since Japanese inflation is above US CPI and the Bank of Japan is the only G-10 central bank with a tight money bias. The euro will be goosed by the trillion dollar German rearmament pivot and Chancellor Merz’s fiscal expansion. Sterling is an anti-dollar Cinderella but Labour has four hundred plus MPs in Westminster and Sir Keir has mastered Tony Blair’s art of Podolenomics with his Trumpian trade embrace.
Seven, the smart money has increased its short dollar bets on a quantum scale. If the Chicago CFTC speculative trade data and the Planet Forex options skew/gossip grapevine are any guide as they always are for me, my macro lodestars tells me that this dollar dead kitty bounce will soon end and the downside risk abyss is ghastly. MAGA has made the dollar leprosy for global investors and hedge funds.
GCC investors have already lost 12% of their assets because they are 100% exposed to the U.S. dollar due to their FX pegs. This is no time to be an ostrich with its head in the sand, as the currency wars rage and Planet Forex, lest you end up losing 40% of your dollar assets in the next 3 years. The wolf is real and the wolf is here.
Also published on Medium.
Notice an issue?
Arabian Post strives to deliver the most accurate and reliable information to its readers. If you believe you have identified an error or inconsistency in this article, please don’t hesitate to contact our editorial team at editor[at]thearabianpost[dot]com. We are committed to promptly addressing any concerns and ensuring the highest level of journalistic integrity.